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Filtered Waves 21st century

(Back to the Basics)


Bloomberg, Nov. 2007

Copyright 1996 2007 Linda


Raschke and LBRGroup Inc.
All Rights Reserved.

Copyright Notices
This presentation is copyrighted:
1996 2007 LBRGroup / Linda Raschke.
All Rights Reserved.

Certain chart images are copyrighted by Aspen Research Group.

Certain chart images are copyrighted by Tradestation


Technologies.

Certain chart images are copyrighted by CQG.

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.


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Filtered Waves Basic Theory
Arthur Merrill, 1977
Arthur Merrills filtered waves used a percentage of price movement
(5%) to filter out the noise. His work was important because he
dedicated a whole book to the concept of classifying patterns by the
wave structure.
Gann was probably the most popular predecessor of swing charting.
Welles Wilder documented the use of ATR (Average True Range)
functions to quantify swings as opposed to percent functions. This
was applied to a system called the Volatility stop and reverse
system.
Merrills work was far more comprehensive, in that not only did he
classify previous market structures, he also developed classic
actuarial tables, or probability grids, to measure the median %
increase/decrease and duration of bull and bear markets.

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Wave Structure

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Market Structure as measured by Swings

Waves eliminate noise and thus make is easier to determine TREND


Additionally, the absolute support and resistance are one more way
of adding structure. While Art Merrill used a percent function, we use
an ATR function. A new Up Wave starts when price moves 3 ATRs
up from the lowest low or lowest close over 15-period look-back. A
new Down wave starts when price moves 3 ATRs down from the
highest high or highest close over 15-period look back period.

Once market swings have been quantified, relationships, turning points,


and trend can once again be classified, counted, examined and
expressed in numbers. We can start to build a probability grid,
evaluating trade management strategies.

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5

MER waves define structure and trade opportunity. Some wave patterns lead to small wins, some have
above average odds of a bigger win.

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BNI Wave structure is one of the primary basis of a trade.

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NEM - trading opportunities based off wave structure. Trend trade, Power Buy, Trend Scalp, Failure
Test up, Failure Test down, Breakout coil (trend reversal), Trend Scalp

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8
Wave Structure Dollar in an up trend

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Waves structure still shows uptrend

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Uptrend still intact, volatility contracting

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Trend Reversal Down when Power Buy fails

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Up waves are now shorting opportunities

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13

The first trend reversal up

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14
Trend Reversal from up to down again Weekly chart

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The trend in 30-year yields reversed on the daily charts at the end of 2005.

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Dow 5 minute, 3/10 oscillator supports the structure in the waves.

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Swing Exercise Weekly Dollar Index: Trend reversal from Up to Down. (note:
momentum oscillators can be misleading )

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Failure test after downtrend, reversal back to uptrend

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A failed bear flag is the same as a failure test or failure swing. The reversal
point is what we call a U- turn Buy

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Yield chart extreme example of reaction up in downtrend. Despite the sharp
swing up, the wave structure for rates remained in a steady downtrend in 2004.

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How can structure aid in identifying the sweet spots in the data?
Trailing stops only degraded any edge extracted from
relatively simple rules. There are no combination targets
and stops, even with the use of one filter, where it is
more profitable to trail a stop then playing for a small
win. However, when using two time frames, there are
sweet spots in the data that do lead to bigger wins or a
higher then average expectation of greater trendiness.

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22
Sweet spot with detail on short time frame

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23

Trend reversal on hourlies precedes trend reversal on higher time frame.

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24
Comparison of different structural points small target versus large target

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Japan Index Trend reversal is a Process!

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26
Russell 2000 Weekly Chart

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27

Russell 2000 Daily chart

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28
SP 500 Weekly Chart

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29

DJ Transport Index Weekly Chart

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DJ Transport Index Daily Chart

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DJ Utilities Index Weekly Chart

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32
Brazil Daily Chart

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33

FXI Daily Chart

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Japan Index Weekly Chart

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35

Weekly Dollar Index

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Dollar Index Daily Chart

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37

Dollar Index Hourly Chart

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38
Goldman Sachs Spot Index - Weekly

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39

GSI Daily chart

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40
GSI Daily chart with more data

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41

Hourly chart of Crude

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42
Hourly chart of Gold

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43

Copper Weekly Continuation

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44
Copper Intraday detail of failed A B C

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45

Wheat - Daily

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46
Wheat hourly chart

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47

SP E mini 3600 tick chart structure

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SP E mini 800 tick chart structure

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SP E mini 800 tick chart resolution!

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